Quality or Price? Evidence from ODA-Financed Public Procurement

Abstract

Infrastructure is essential for economic growth, and public procurement is an important instrument to use limited resources effectively. Among public procurers there remains a strong view that quality should not be compromised, particularly in high-value transactions, such as infrastructure projects. The common practice excludes incompetent applicants from the selection process. An alternative view is that infrastructure procurement can stimulate the economy by loosing qualification standards. The article examines this trade-off between price and quality. Using procurement data from electricity projects in developing countries, it shows that the adoption of substantive quality qualification increases bid prices for technical reasons and deters the bidder entry, which would raise procurement costs further. The auctioneer’s decision to adopt the quality qualification procedure is also found exogenous, meaning that auctioneers would not compromise the quality of projects regardless of the level of competition. This is an important measure to ensure the quality of complex infrastructure works.